cocv_homeowner_to_investor_web

HOMEOWNERS
MORTGAGE LENDER
INVESTORS
BANKERS
HEDGE FUNDS
INVESTMENT BANKER TRANCHES
MORTGAGE
COLLATERALIZED DEBT OBLIGATION
SELLING THE
MORTGAGE
The lender gets a call from an INVESTMENT BANKER to buy his mortgage — a nice payday for the lender. Along with the mortgage, the
lender has also sold his risk. Were the homeowner to default, it is now the banker’s problem.
INSIDE A CDO
The banker then slices the box into three slices, or TRANCHES . The tranches work like 3 cascading trays.As money from mortgage payments comes in, the top tray fills up first, then spills over into the middle, then finally into the bottom.If some homeowners default on their mortgages, less money comes in, and the bottom tray may not get filled.
This makes the bottom tray riskier, and the top tray safer.T o compensate for the higher risk, the owner of the bottom tray receives a higher rate of return, and the top tray receives a lower (but still nice) return.
MAKING IT “SAFE”
The banker splits the CDO this way so that CREDIT RATING AGENCIES will rate the top tranche with the safest rating: AAA.
The middle tranche is rated BBB (still pretty good).
And they don’t bother to rate the bottom, risky slice.
TRANSFORMING THE MORTGAGE
The banker borrows millions of dollars and buys thousands more mortgages and puts them into a nice big box.This means that every month, the banker gets the monthly payment from all of the mortgage holders in the box, like me.
This box is called a
COLLATERALIZED DEBT OBLIGATION , or CDO.
$
$
V I S U A L
I Z E D C R E
D I T C R I S I S o ƒ
T H
E
BY JONATHAN JARVIS。